Are Liquidity and Information Risks Priced in the Treasury Bond Market?

ABSTRACT

We provide a comprehensive empirical analysis of the effects of liquidity and information risks on expected returns of Treasury
bonds. We focus on the systematic liquidity risk of Pastor and Stambaugh as opposed to the traditional microstructure‐based
measures of liquidity. Information risk is measured by the probability of information‐based trading (PIN). We document a strong
positive relation between expected Treasury returns and liquidity and information risks, controlling for the effects of other
systematic risk factors and bond characteristics. This relation is robust to many empirical specifications and a wide variety
of traditional liquidity and informed trading proxies.